Paul Price's Instablog After college at The American University [BS - 1971] and dental school at University of Pennsylvania [DMD - 1977] Paul served as a dental officer in the United States Air Force both domestically and overseas in Turkey and England. As his student loans diminished he was seduced by the market. From casual investing, starting in 1977, he devoted more and more time to equity research. In 1987 he made a full-time career switch by joining Merrill Lynch. Over the next 13 years he also worked with A.G. Edwards, Wheat First [now Wachovia Securities], and Ferris, Baker Watts. Dr. Price had enough success to retire in October 2000 but continues to help friends and family with their investments. He continues to give occasional investment seminars for civic groups and business schools. Paul Price http://seekingalpha.com Two old-line, closed-end funds are worth considering right now- GAM & ADX http://seekingalpha.com/instablog/166130-paul-price/41651-two-old-line-closed-end-funds-are-worth-considering-right-now-gam-adx?source=feed 41651  

General American Investors and Adams Express Company
Closed-end mutual funds are similar to normal open-end mutual funds but offer some distinct advantages. Because they trade like ‘stocks’- selling at market prices rather than NAV - you can often buy them at significant discounts to their true asset values. Secondly, because they manage a fixed pool of dollars their portfolio managers are not subject to the destructive pressures of net cash inflows and withdrawal requests.
Retail investors generally pull money out of mutual funds when stocks are cheap forcing money managers to sell when they’d like to be buying. After big gains in the market public investors often plow money into mutual funds while chasing past performance. This forces open-end fund managers to either dilute the performance of older investors, by hoarding the newly deposited cash, or to buy more shares of current or new holdings at now much higher prices than before the rally.
Closed-end managers avoid these problems because their ‘money flow’ is limited to dividend or capital gains payments and/or occasional secondary or rights offerings. If a closed-end fund gets ‘hot’ demand for the shares will push the share price higher on the exchange where it trades as the fund’s NAV increases. Because the share price can be at a discount to NAV a favored closed-end fund can also see share price gains due to shrinking discounts or even premium to NAV pricing.
Discounts and premiums to NAV fluctuate in much the same way that normal company stocks sees changes in price to earnings ratios. Big gains can often be made by loading up when a company’s P/E is lower than normal. Similarly, better than typical profits can often be posted by buying closed-end funds when their discounts to NAV are larger than average based on that same fund’s history.
Here is a generic example of how that would work…
Starting NAV
Share Price / Initial Discount
Ending NAV
Share Price / Current Discount
$10.00
$8.50 / 15%
$13.00
$11.96 / 8%
This theoretical fund’s NAV increased 30% while the shareholders saw a 40.7% net return
 
As the NAV grew, the discount shrunk, giving fund holders a ‘double play’ bonus. This is not possible with open-end funds that are always bought and sold at the day’s end NAV.
Another benefit of buying closed-end funds at discounts is that you draw all the dividends and capital gains based on the full NAV – not the price you paid for the shares. Over time this is a significant advantage. Fund holders get more than the stated dividend yield on the portfolio because they get full distributions without paying full price.
General American Investors [GAM] was formed in 1927 while Adams Express [ADX] started up in 1929. They have stood the test of time. GAM focuses more on growth stocks while ADX is more of a conservative, blue-chip oriented fund.
Here were the top 10 holdings for each of them as of last September 30th:
General American Investors - GAM
Adams Express Company - ADX
TJX Companies [TJ MAXX]
Petroleum and Resources
Weatherford International
Microsoft
Costco Wholesale
General Electric
Qualcomm Inc.
Unilever plc [ADRs]
Wyeth
Oracle
Apache Corp.
PepsiCo
Wal-Mart Stores
Cisco Systems
Republic Services
JP Morgan Chase
CEMEX SA [ADRs]
Bank of America
ABB Ltd. [ADRs]
United Technologies
Top 10 holdings = 37.9% of portfolio
Top 10 holdings = 24.9% of portfolio
 
As of the December 30. 2009 close GAM had a net asset value of $27.78 and a market price of $23.50 for a discount of 15.41%. Adams Express had an NAV of $12.06 and a closing price of $10.14 for a discount of 15.92%.
Are these 15 – 16% discounts better or worse than typical for these funds? Here are the past years’ average discounts as reported by Value Line:
 
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
GAM
10%
9%
6%
7%
10%
11%
11%
8%
9%
13%
ADX
17%
12%
10%
12%
12%
13%
14%
14%
14%
16%
 
The current discount on GAM is well better its 10-year average discount of 9.3% and is now the highest of the past decade. General American has posted a reasonable expense ratio of about 0.9% over the past 10 years. General American has nicely outperformed the S&P 500 over the past 1, 5, 10 and 20 years.
Adam Express’s current 19.92% discount is close its highest during the past decade. Adams Express has shown an extremely low 0.4% expense ratio over the 10 years. If you believe it’s time for large-cap, high quality stocks to being outperforming this fund looks like a good choice.
Summary: 
Closed –end funds offer some distinct advantages over their open-ended brethren. General American Investors has shown solid results for its better than 80 year history and offers a discounted way to play ‘growth stocks’.
Adams Express also has more than 80 years of fund management expertise and offers rock bottom expenses along with the chance for nice future returns in the big-cap, blue chip arena. The dividend yield alone on ADX shares is now above 2.5% and they generally pay decent capital gains distributions each year as well.


Disclosure: Long GAM & ADX]]> Wed, 30 Dec 2009 18:49:11 -0500  

General American Investors and Adams Express Company
Closed-end mutual funds are similar to normal open-end mutual funds but offer some distinct advantages. Because they trade like ‘stocks’- selling at market prices rather than NAV - you can often buy them at significant discounts to their true asset values. Secondly, because they manage a fixed pool of dollars their portfolio managers are not subject to the destructive pressures of net cash inflows and withdrawal requests.
Retail investors generally pull money out of mutual funds when stocks are cheap forcing money managers to sell when they’d like to be buying. After big gains in the market public investors often plow money into mutual funds while chasing past performance. This forces open-end fund managers to either dilute the performance of older investors, by hoarding the newly deposited cash, or to buy more shares of current or new holdings at now much higher prices than before the rally.
Closed-end managers avoid these problems because their ‘money flow’ is limited to dividend or capital gains payments and/or occasional secondary or rights offerings. If a closed-end fund gets ‘hot’ demand for the shares will push the share price higher on the exchange where it trades as the fund’s NAV increases. Because the share price can be at a discount to NAV a favored closed-end fund can also see share price gains due to shrinking discounts or even premium to NAV pricing.
Discounts and premiums to NAV fluctuate in much the same way that normal company stocks sees changes in price to earnings ratios. Big gains can often be made by loading up when a company’s P/E is lower than normal. Similarly, better than typical profits can often be posted by buying closed-end funds when their discounts to NAV are larger than average based on that same fund’s history.
Here is a generic example of how that would work…
Starting NAV
Share Price / Initial Discount
Ending NAV
Share Price / Current Discount
$10.00
$8.50 / 15%
$13.00
$11.96 / 8%
This theoretical fund’s NAV increased 30% while the shareholders saw a 40.7% net return
 
As the NAV grew, the discount shrunk, giving fund holders a ‘double play’ bonus. This is not possible with open-end funds that are always bought and sold at the day’s end NAV.
Another benefit of buying closed-end funds at discounts is that you draw all the dividends and capital gains based on the full NAV – not the price you paid for the shares. Over time this is a significant advantage. Fund holders get more than the stated dividend yield on the portfolio because they get full distributions without paying full price.
General American Investors [GAM] was formed in 1927 while Adams Express [ADX] started up in 1929. They have stood the test of time. GAM focuses more on growth stocks while ADX is more of a conservative, blue-chip oriented fund.
Here were the top 10 holdings for each of them as of last September 30th:
General American Investors - GAM
Adams Express Company - ADX
TJX Companies [TJ MAXX]
Petroleum and Resources
Weatherford International
Microsoft
Costco Wholesale
General Electric
Qualcomm Inc.
Unilever plc [ADRs]
Wyeth
Oracle
Apache Corp.
PepsiCo
Wal-Mart Stores
Cisco Systems
Republic Services
JP Morgan Chase
CEMEX SA [ADRs]
Bank of America
ABB Ltd. [ADRs]
United Technologies
Top 10 holdings = 37.9% of portfolio
Top 10 holdings = 24.9% of portfolio
 
As of the December 30. 2009 close GAM had a net asset value of $27.78 and a market price of $23.50 for a discount of 15.41%. Adams Express had an NAV of $12.06 and a closing price of $10.14 for a discount of 15.92%.
Are these 15 – 16% discounts better or worse than typical for these funds? Here are the past years’ average discounts as reported by Value Line:
 
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
GAM
10%
9%
6%
7%
10%
11%
11%
8%
9%
13%
ADX
17%
12%
10%
12%
12%
13%
14%
14%
14%
16%
 
The current discount on GAM is well better its 10-year average discount of 9.3% and is now the highest of the past decade. General American has posted a reasonable expense ratio of about 0.9% over the past 10 years. General American has nicely outperformed the S&P 500 over the past 1, 5, 10 and 20 years.
Adam Express’s current 19.92% discount is close its highest during the past decade. Adams Express has shown an extremely low 0.4% expense ratio over the 10 years. If you believe it’s time for large-cap, high quality stocks to being outperforming this fund looks like a good choice.
Summary: 
Closed –end funds offer some distinct advantages over their open-ended brethren. General American Investors has shown solid results for its better than 80 year history and offers a discounted way to play ‘growth stocks’.
Adams Express also has more than 80 years of fund management expertise and offers rock bottom expenses along with the chance for nice future returns in the big-cap, blue chip arena. The dividend yield alone on ADX shares is now above 2.5% and they generally pay decent capital gains distributions each year as well.


Disclosure: Long GAM & ADX]]> gam adx long ideas mutual funds It’s good to have NRG. http://seekingalpha.com/instablog/166130-paul-price/41360-its-good-to-have-nrg?source=feed 41360 NRG Energy looks cheap right now.
NRG Energy, Inc. is a wholesale power generation company, primarily engaged in the ownership and operation of power generation facilities and the sale of energy, capacity and related products in the United States and internationally. The Company has a diverse portfolio of electric generation facilities in terms of geography, fuel type and dispatch levels. It seeks to maximize operating income through the efficient procurement and management of fuel supplies and maintenance services, and the sale of energy, capacity and ancillary services into attractive spot, intermediate and long-term markets.
At today’s close of $24.21 NRG shares are down significantly from their 2007 and 2008 highs of $47.20 and $45.80. Earnings can vary widely with competing energy pricing and the effects of hedging activities. There is not a clear view of what to expect. Here are the current EPS views (on continuing operations) for 2009 and 2010 from three different and respected sources…
 
2009 Estimate
2010 Estimate
Value Line
$3.55
$2.74
Yahoo Finance
$2.86
$2.08
Zacks
$2.74
$2.11
 
Even at the low-end expectations NRG now trades for < 8.9x this year’s and under 11.7x next year’s earnings. If the high-end materializes the multiples would be 6.8x and 8.8x respectively.
Here are the more detailed per share numbers from continuing ops as reported by Value Line:
Year
Sales
C/F
EPS
B/V
Avg. P/E
Range
2004
13.56
2.13
0.81
13.05
15.4x
9.00-18.10
2005
16.76
1.56
0.33
11.20
NMF
15.10-24.70
2006
22.98
4.49
1.82
19.35
13.4x
20.90-29.70
2007
25.30
4.95
1.95
19.35
20.1x
27.20-47.20
2008
29.38
6.87
3.66
26.56
9.4x
14.40-45.80
 
It is noteworthy that NRG shares changed hands as high as $29.70 - $47.20 in both 2006 and 2007 when earnings were well below both today’s trailing and next year’s expected EPS. Clearly there is big upside potential for buyers at the current quote.  
Morningstar rates NRG at 4-stars (out of 5) and sees ‘fair value’ as $37.00 /share. Standard and Poors also assigns NRG 4-stars (out of 5) and carries a 12-month price target of $30 /share.
Here are two ways to play NRG using buy/writes for about 5 ½  and/or 24 ½  month time horizons.
 
Cash Outlay
Cash Inflow
Buy 1000 shares NRG @$24.21 /sh.
$24,210
 
Sell 10 June $25 calls @$2.15 /share
 
$2,150
Sell 10 June $25 puts @$3.00 /share
 
$3,000
Net Cash Out-of-Pocket
$19,060
 
 
On the June 18, 2010 expiration date…
If NRG rises to at least $25 (+ 3.3% from today’s price):
·        The $25 calls will be exercised.
·        Your shares will be sold for $25,000.
·        The $25 puts will expire worthless.
·        You will be left with no shares and $25,000 in cash.
·        You will have no further option obligations.
That would be a best-case scenario net cash-on-cash profit of $5,940/$19,060 = 31.1% achieved in under six months on shares that only needed to rise by 3.3% or better.
 
What’s the downside?
If NRG remains below $25 on the June 18, 2010 expiration date:
·        The $25 calls will expire worthless.
·        The $25 puts will be exercised.
·        You will be forced to buy another 1000 shares.
·        You will need to lay out an additional $25,000 in cash.
·        You will end up with 2000 NRG shares.
·        You will have no further option obligations.
 
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.21 purchase price less the $2.15 /share call
premium = $22.06 /share.
On the ‘put’ shares it’s the $25 strike price less the $3.00 /share put premium
= $22.00 /share.
Your overall break-even would be $22.03 /share. NRG could fall by as much as $2.18 (or -9%) without causing a loss on this trade.
 
Unless you see NRG going down more than 9% by mid-June the risk/reward here looks very good.
 
Long-term traders consider this more aggressive buy/write combination…
 
Cash Outlay
Cash Inflow
Buy 1000 NRG @$24.21 /share
$24,210
 
Sell 10 Jan. 2012 $30 calls @$3.70 /share
 
$3,700
Sell 10 Jan. 2012 $30 puts @$8.70 /share
 
$8,700
Net Cash Out-of-Pocket
$11,810
 
 
If NRG goes up to $30 or higher (+ 24%) by the Jan. 2012 expiration date…
·        The $30 calls will be exercised.
·        You will sell your shares for $30,000.
·        The $30 puts will expire worthless.
·        You will be left with no shares and $30,000 in cash.
·        You will have no further option obligations.
That would result in a best-case scenario net profit of $18,190/$11,810 = 154% cash-on-cash.
Not too bad for a minimum move of 24% over a  25.6 month holding period.
 
What’s the downside?
If NRG remains below $30 through the Jan. 2012 expiration date…
·        The $30 calls will expire worthless.
·        The $30 puts will be exercised.
·        You will be forced to buy another 1000 NRG shares.
·        You will need to lay out an additional $30,000 in cash.
·        You will end up with 2000 NRG shares.
·        You will have no further option obligations.
 
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.21 purchase price less the $3.70 /share
call premium = $20.51 /share.
On the ‘put’ shares it’s the $30 strike price less the $8.70 /share put premium = $21.30 /share.
Your overall break-even would be $20.91 /share or (-13.6%) below the trade inception price.
Summary: In this longer-term trade you have maximum upside of 154% on any move of + 24% or greater while you are protected against loss on any drop of less than 13.5%.
 
 


Disclosure: Disclosure: Author is long NRG shares and short NRG options. ]]> Mon, 28 Dec 2009 20:15:40 -0500 NRG Energy looks cheap right now.
NRG Energy, Inc. is a wholesale power generation company, primarily engaged in the ownership and operation of power generation facilities and the sale of energy, capacity and related products in the United States and internationally. The Company has a diverse portfolio of electric generation facilities in terms of geography, fuel type and dispatch levels. It seeks to maximize operating income through the efficient procurement and management of fuel supplies and maintenance services, and the sale of energy, capacity and ancillary services into attractive spot, intermediate and long-term markets.
At today’s close of $24.21 NRG shares are down significantly from their 2007 and 2008 highs of $47.20 and $45.80. Earnings can vary widely with competing energy pricing and the effects of hedging activities. There is not a clear view of what to expect. Here are the current EPS views (on continuing operations) for 2009 and 2010 from three different and respected sources…
 
2009 Estimate
2010 Estimate
Value Line
$3.55
$2.74
Yahoo Finance
$2.86
$2.08
Zacks
$2.74
$2.11
 
Even at the low-end expectations NRG now trades for < 8.9x this year’s and under 11.7x next year’s earnings. If the high-end materializes the multiples would be 6.8x and 8.8x respectively.
Here are the more detailed per share numbers from continuing ops as reported by Value Line:
Year
Sales
C/F
EPS
B/V
Avg. P/E
Range
2004
13.56
2.13
0.81
13.05
15.4x
9.00-18.10
2005
16.76
1.56
0.33
11.20
NMF
15.10-24.70
2006
22.98
4.49
1.82
19.35
13.4x
20.90-29.70
2007
25.30
4.95
1.95
19.35
20.1x
27.20-47.20
2008
29.38
6.87
3.66
26.56
9.4x
14.40-45.80
 
It is noteworthy that NRG shares changed hands as high as $29.70 - $47.20 in both 2006 and 2007 when earnings were well below both today’s trailing and next year’s expected EPS. Clearly there is big upside potential for buyers at the current quote.  
Morningstar rates NRG at 4-stars (out of 5) and sees ‘fair value’ as $37.00 /share. Standard and Poors also assigns NRG 4-stars (out of 5) and carries a 12-month price target of $30 /share.
Here are two ways to play NRG using buy/writes for about 5 ½  and/or 24 ½  month time horizons.
 
Cash Outlay
Cash Inflow
Buy 1000 shares NRG @$24.21 /sh.
$24,210
 
Sell 10 June $25 calls @$2.15 /share
 
$2,150
Sell 10 June $25 puts @$3.00 /share
 
$3,000
Net Cash Out-of-Pocket
$19,060
 
 
On the June 18, 2010 expiration date…
If NRG rises to at least $25 (+ 3.3% from today’s price):
·        The $25 calls will be exercised.
·        Your shares will be sold for $25,000.
·        The $25 puts will expire worthless.
·        You will be left with no shares and $25,000 in cash.
·        You will have no further option obligations.
That would be a best-case scenario net cash-on-cash profit of $5,940/$19,060 = 31.1% achieved in under six months on shares that only needed to rise by 3.3% or better.
 
What’s the downside?
If NRG remains below $25 on the June 18, 2010 expiration date:
·        The $25 calls will expire worthless.
·        The $25 puts will be exercised.
·        You will be forced to buy another 1000 shares.
·        You will need to lay out an additional $25,000 in cash.
·        You will end up with 2000 NRG shares.
·        You will have no further option obligations.
 
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.21 purchase price less the $2.15 /share call
premium = $22.06 /share.
On the ‘put’ shares it’s the $25 strike price less the $3.00 /share put premium
= $22.00 /share.
Your overall break-even would be $22.03 /share. NRG could fall by as much as $2.18 (or -9%) without causing a loss on this trade.
 
Unless you see NRG going down more than 9% by mid-June the risk/reward here looks very good.
 
Long-term traders consider this more aggressive buy/write combination…
 
Cash Outlay
Cash Inflow
Buy 1000 NRG @$24.21 /share
$24,210
 
Sell 10 Jan. 2012 $30 calls @$3.70 /share
 
$3,700
Sell 10 Jan. 2012 $30 puts @$8.70 /share
 
$8,700
Net Cash Out-of-Pocket
$11,810
 
 
If NRG goes up to $30 or higher (+ 24%) by the Jan. 2012 expiration date…
·        The $30 calls will be exercised.
·        You will sell your shares for $30,000.
·        The $30 puts will expire worthless.
·        You will be left with no shares and $30,000 in cash.
·        You will have no further option obligations.
That would result in a best-case scenario net profit of $18,190/$11,810 = 154% cash-on-cash.
Not too bad for a minimum move of 24% over a  25.6 month holding period.
 
What’s the downside?
If NRG remains below $30 through the Jan. 2012 expiration date…
·        The $30 calls will expire worthless.
·        The $30 puts will be exercised.
·        You will be forced to buy another 1000 NRG shares.
·        You will need to lay out an additional $30,000 in cash.
·        You will end up with 2000 NRG shares.
·        You will have no further option obligations.
 
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.21 purchase price less the $3.70 /share
call premium = $20.51 /share.
On the ‘put’ shares it’s the $30 strike price less the $8.70 /share put premium = $21.30 /share.
Your overall break-even would be $20.91 /share or (-13.6%) below the trade inception price.
Summary: In this longer-term trade you have maximum upside of 154% on any move of + 24% or greater while you are protected against loss on any drop of less than 13.5%.
 
 


Disclosure: Disclosure: Author is long NRG shares and short NRG options. ]]> nrg long ideas options energy Penson Worldwide - PNSN .... Temporary Weakness Presents an Opportunity http://seekingalpha.com/instablog/166130-paul-price/40249-penson-worldwide-pnsn-temporary-weakness-presents-an-opportunity?source=feed 40249 Penson Worldwide, Inc. provides various critical securities and futures processing infrastructure products and services to the financial services industry. They offer trade execution, clearing and custody, trade settlement, technology, risk management, customer account processing, and data processing; and financing and cash management technology. Penson also participates in margin lending, securities lending, and borrowing transactions, primarily to facilitate clearing activities and proprietary trading. They also offer tools and services to support trading in multiple markets, asset classes, and currencies. It serves online, direct access, and traditional retail brokers, as well as banks, institutional brokers, financial technology companies, and securities exchanges in the United States, Canada, Europe, and Asia. Penson Worldwide, Inc. was founded in 1995 and is headquartered in Dallas, Texas.
Penson came public in 2006 and has remained solidly profitable despite the market meltdown of 2008 – 2009. Earnings have suffered due to the much lower net interest income caused by the Fed’s move to near zero short-term interest rates. Once rates begin to rise again (not too far away in my view) profits should expand rapidly and the share price may well surge back towards historical valuations.
Here are Penson’s per share numbers (from continuing operations) as reported in the company’s 2008 annual report:
Year
Sales
EPS
B/V
P/BV Range
Avg. P/E
52-week Range
2005
N/A
0.16
N/A
N/A
N/A
N/A
2006
11.47
1.05
8.45
1.8x-3.3x
19.1x
15.34 – 28.08
2007
15.85
1.26
10.39
1.3x-3.4x
17.6x
13.46 – 34.91
2008*
15.23
1.16
10.49
0.45x-1.8x
10.4x
4.71 – 19.36
* 2008 EPS excludes a $0.69/share non-recurring write off from a customer receivable.
 
The Q4 2008 write-off was the result of fraudulent activities of a client firm. Penson has implemented new risk-management procedures to ensure this does not recur.
Earnings for 2009 are expected to come in around $0.62 /share before rebounding to about $0.83 /share in 2010. At yesterday’s close of $8.65 that puts the multiple at 14x this year’s depressed earnings and < 10.5x 2010’s expectations.
When times were more normal PNSN shares typically fluctuated between 1.5x and 3x book value during the course of a calendar year. As of September 30, 2009 book value had grown to $11.51 /share. A rebound to even 1.5x book value would bring these shares back to $17.26 or almost double today’s quote.
Is that a reasonable target price? Why not? Penson shares changed hands at highs of $28.08, $34.91 and $19.36 in 2006, 2007 and 2008. In fact, the dead lows I 2006 and 2007 were $15.34 and $13.46 respectively. PNSN has traded as high as $12.23 already in 2009.
While revenues and earnings will take some time to regain their ‘boom times’ levels, it won’t require a full rebound to make a nice profit from today’s sub-$9 share price. The easy year-over year comparisons starting with the next quarterly report may be all that is needed to get these shares moving up again.
 
 


Disclosure: Author is long PNSN shares and short PNSN puts.]]> Thu, 17 Dec 2009 07:11:24 -0500 Penson Worldwide, Inc. provides various critical securities and futures processing infrastructure products and services to the financial services industry. They offer trade execution, clearing and custody, trade settlement, technology, risk management, customer account processing, and data processing; and financing and cash management technology. Penson also participates in margin lending, securities lending, and borrowing transactions, primarily to facilitate clearing activities and proprietary trading. They also offer tools and services to support trading in multiple markets, asset classes, and currencies. It serves online, direct access, and traditional retail brokers, as well as banks, institutional brokers, financial technology companies, and securities exchanges in the United States, Canada, Europe, and Asia. Penson Worldwide, Inc. was founded in 1995 and is headquartered in Dallas, Texas.
Penson came public in 2006 and has remained solidly profitable despite the market meltdown of 2008 – 2009. Earnings have suffered due to the much lower net interest income caused by the Fed’s move to near zero short-term interest rates. Once rates begin to rise again (not too far away in my view) profits should expand rapidly and the share price may well surge back towards historical valuations.
Here are Penson’s per share numbers (from continuing operations) as reported in the company’s 2008 annual report:
Year
Sales
EPS
B/V
P/BV Range
Avg. P/E
52-week Range
2005
N/A
0.16
N/A
N/A
N/A
N/A
2006
11.47
1.05
8.45
1.8x-3.3x
19.1x
15.34 – 28.08
2007
15.85
1.26
10.39
1.3x-3.4x
17.6x
13.46 – 34.91
2008*
15.23
1.16
10.49
0.45x-1.8x
10.4x
4.71 – 19.36
* 2008 EPS excludes a $0.69/share non-recurring write off from a customer receivable.
 
The Q4 2008 write-off was the result of fraudulent activities of a client firm. Penson has implemented new risk-management procedures to ensure this does not recur.
Earnings for 2009 are expected to come in around $0.62 /share before rebounding to about $0.83 /share in 2010. At yesterday’s close of $8.65 that puts the multiple at 14x this year’s depressed earnings and < 10.5x 2010’s expectations.
When times were more normal PNSN shares typically fluctuated between 1.5x and 3x book value during the course of a calendar year. As of September 30, 2009 book value had grown to $11.51 /share. A rebound to even 1.5x book value would bring these shares back to $17.26 or almost double today’s quote.
Is that a reasonable target price? Why not? Penson shares changed hands at highs of $28.08, $34.91 and $19.36 in 2006, 2007 and 2008. In fact, the dead lows I 2006 and 2007 were $15.34 and $13.46 respectively. PNSN has traded as high as $12.23 already in 2009.
While revenues and earnings will take some time to regain their ‘boom times’ levels, it won’t require a full rebound to make a nice profit from today’s sub-$9 share price. The easy year-over year comparisons starting with the next quarterly report may be all that is needed to get these shares moving up again.
 
 


Disclosure: Author is long PNSN shares and short PNSN puts.]]> pnsn long ideas financials PriceSmart, Inc. – The ‘Costco’ of Latin America http://seekingalpha.com/instablog/166130-paul-price/39926-pricesmart-inc-the-costco-of-latin-america?source=feed 39926  
PriceSmart, Inc. engages in the ownership
and operation of U.S-style membership shopping warehouse
clubs in Central America and the Caribbean. These
warehouse clubs sell basic consumer goods to individuals
and businesses. The clubs offer a selection of products,
including perishable foods and basic consumer items. They
also provide ancillary services, which include food services,
bakery, tire centers, and photo centers. As of July 7,
PriceSmart operated in 26 warehouse clubs in 11 countries
and one U.S. territory, including four in Panama; five in
Costa Rica; three each in Guatemala and Trinidad; two each
in the Dominican Republic, El Salvador, and Honduras; and
one each in Aruba, Barbados, Jamaica, Nicaragua, and the
United States Virgin Islands.

When Sol Price sold his U.S. – based PriceClubs to Costco he was no longer allowed to compete with COST here at home. PriceSmart was developed to recreate the same experience in Central America and the Caribbean. Sol’s son Robert Price is now CEO and Chairman of the very successful discount chain. [Sol died this week at age 93].
Business has been very good despite the poor economic climate. Recently announced earnings for FY 2009 (ended August 31) came in at $1.45 /share versus $1.30 in FY 2008. Here are PSMT’s per share (fully diluted) numbers as reported in their annual report.
FY*
Sales
C/F
EPS
Div.
B/V
Avg. P/E
Range
2005
24.02
d.0.52
d. 3.15
Nil
7.75
NMN
6.11 – 8.70
2006
25.24
0.61
0.30
Nil
8.10
31.2x
7.55 – 20.64
2007
30.13
0.88
0.44
0.32
8.36
32.6x
13.31 – 33.67
2008
37.65
1.67
1.30
0.32
9.27
20.3x
10.35 – 31.89
2009
42.89
1.85
1.45
0.50
10.27
11.7x
13.76 – 21.50
* FYs end Aug, 31st
Semi-annual dividends were initiated in 2007 at a $0.32 yearly rate that was raised to $0.50 per year in 2009. The next dividend announcement should come by next month with another hike likely. At the present rate, the current yield is already a decent 2.51% at yesterday’s close of $19.94 /share.
Zacks sees FY 2010 and 2011 estimates of $1.49 and $1.73 respectively making the multiple about 13.4x this year’s and approximately 11.5x next year’s expectations. Compare those P/Es with CostCo’s at 20.6x this year’s and 18.6x next year’s estimates. Also note the historical P/E levels for PSMT itself from the chart shown above.
A return to a still lower-than-normal 16 multiple would bring PSMT shares back to $23.84 by next summer and to a goal of $27.68 by the end of FY 2011. Those targets doesn’t seem out of line considering the excellent sales, earnings, dividend and book value growth since 2005. Note that PSMT shares hit peak trades of $31.89 and $33.67 in 2007 and 2008 when fundamentals were not as strong as they are today.
They have been occasional rumors that Wal-Mart may consider a buyout of the whole company as a cheap and quick way to expand their Latin American operations.  
Summary:
PriceSmart is a well-run discount retailer that is thriving even during a major economic downturn. The valuation looks compelling and the yield is better than what’s now available on money markets and 1 – 2 year CDs.
Buyers today will qualify for the next semi-annual dividend (expected in January) and position themselves for total returns that look quite good. The takeover possibility, while unpredictable, adds a potential bonus to the expected projections.
(I previously wrote up PSMT on www.BeatingBuffett.com  May 27, 2009 at a price of $15.75 /share.)


Disclosure: Author is long PSMT shares.]]> Tue, 15 Dec 2009 08:26:02 -0500  
PriceSmart, Inc. engages in the ownership
and operation of U.S-style membership shopping warehouse
clubs in Central America and the Caribbean. These
warehouse clubs sell basic consumer goods to individuals
and businesses. The clubs offer a selection of products,
including perishable foods and basic consumer items. They
also provide ancillary services, which include food services,
bakery, tire centers, and photo centers. As of July 7,
PriceSmart operated in 26 warehouse clubs in 11 countries
and one U.S. territory, including four in Panama; five in
Costa Rica; three each in Guatemala and Trinidad; two each
in the Dominican Republic, El Salvador, and Honduras; and
one each in Aruba, Barbados, Jamaica, Nicaragua, and the
United States Virgin Islands.

When Sol Price sold his U.S. – based PriceClubs to Costco he was no longer allowed to compete with COST here at home. PriceSmart was developed to recreate the same experience in Central America and the Caribbean. Sol’s son Robert Price is now CEO and Chairman of the very successful discount chain. [Sol died this week at age 93].
Business has been very good despite the poor economic climate. Recently announced earnings for FY 2009 (ended August 31) came in at $1.45 /share versus $1.30 in FY 2008. Here are PSMT’s per share (fully diluted) numbers as reported in their annual report.
FY*
Sales
C/F
EPS
Div.
B/V
Avg. P/E
Range
2005
24.02
d.0.52
d. 3.15
Nil
7.75
NMN
6.11 – 8.70
2006
25.24
0.61
0.30
Nil
8.10
31.2x
7.55 – 20.64
2007
30.13
0.88
0.44
0.32
8.36
32.6x
13.31 – 33.67
2008
37.65
1.67
1.30
0.32
9.27
20.3x
10.35 – 31.89
2009
42.89
1.85
1.45
0.50
10.27
11.7x
13.76 – 21.50
* FYs end Aug, 31st
Semi-annual dividends were initiated in 2007 at a $0.32 yearly rate that was raised to $0.50 per year in 2009. The next dividend announcement should come by next month with another hike likely. At the present rate, the current yield is already a decent 2.51% at yesterday’s close of $19.94 /share.
Zacks sees FY 2010 and 2011 estimates of $1.49 and $1.73 respectively making the multiple about 13.4x this year’s and approximately 11.5x next year’s expectations. Compare those P/Es with CostCo’s at 20.6x this year’s and 18.6x next year’s estimates. Also note the historical P/E levels for PSMT itself from the chart shown above.
A return to a still lower-than-normal 16 multiple would bring PSMT shares back to $23.84 by next summer and to a goal of $27.68 by the end of FY 2011. Those targets doesn’t seem out of line considering the excellent sales, earnings, dividend and book value growth since 2005. Note that PSMT shares hit peak trades of $31.89 and $33.67 in 2007 and 2008 when fundamentals were not as strong as they are today.
They have been occasional rumors that Wal-Mart may consider a buyout of the whole company as a cheap and quick way to expand their Latin American operations.  
Summary:
PriceSmart is a well-run discount retailer that is thriving even during a major economic downturn. The valuation looks compelling and the yield is better than what’s now available on money markets and 1 – 2 year CDs.
Buyers today will qualify for the next semi-annual dividend (expected in January) and position themselves for total returns that look quite good. The takeover possibility, while unpredictable, adds a potential bonus to the expected projections.
(I previously wrote up PSMT on www.BeatingBuffett.com  May 27, 2009 at a price of $15.75 /share.)


Disclosure: Author is long PSMT shares.]]> psmt long ideas retialing Knight Capital Group http://seekingalpha.com/instablog/166130-paul-price/39830-knight-capital-group?source=feed 39830  [NDQ:NITE] - $14.25  Dec. 14, 2009
Unbelievably cheap for no good reason.
Knight Capital Group provides electronic and voice financial security trade execution services to buy-side, sell-side, and corporate clients as a market maker, agent, and electronic execution provider. They are the largest wholesale market making firm for U.S. equity securities.
After hitting a multi-year high of over $23 /share in early October NITE shares have dropped to near their March 2009 panic lows again. Why? They reported that trading volume was down sequentially from October’s extraordinary levels. Here is the company’s own news release…
"Trading activity slowed in November despite the continued rise of the major market indexes... Nevertheless, Knight recorded solid year-over-year growth in dollar value traded due to higher volumes across products and services." Average daily dollar value traded in November 2009 was $24.6 billion, down approximately 11.2% from $27.7 billion in October 2009 and up approximately 10.4% from $22.3 billion in November 2008. Average daily U.S. equity trade volume in November 2009 was 3.6 million, down approximately 9.6% from 4.0 million in October 2009, and down approximately 14.0% from 4.2 million in November 2008. Average daily U.S. equity share volume was 13.1 billion in November 2009, down approximately 0.7% from 13.2 billion in October 2009, and up approximately 247.2% from 3.8 billion in November 2008.”
Knight is net debt free with more liquid assets than total debt. Earnings are substantial with Zacks estimating $1.44 /share this year and $1.59 /share for 2010. Book value is at record levels with an estimated $11.60 or so expected by year-end.
Here are Knight’s per share numbers from continuing operations as reported by Value Line:
Year
Sales
C/F
EPS
B/V
Avg. P/E
52-wk. range
2004
5.71
0.51
0.36
7.79
31.3x
8.10 – 17.30
2005
5.57
0.51
0.34
7.93
26.5x
7.30 – 11.00
2006
9.18
1.73
1.49
9.29
10.5x
9.00 – 20.50
2007
9.89
1.59
1.24
9.67
12.4x
11.50 – 21.80
2008
11.46
2.28
1.94
11.40
8.4x
11.00 – 19.80
2009*
10.80
1.90
1.44
11.60
13.9x
13.39 – 23.11
          * 2009 includes Q4 estimates
 
At today’s quote of $14.25 NITE trades for just 9.9x this year’s and < 9x next year’s estimates. Excepting the panic lows of 2008 that’s about the lowest valuation ever for this fine company. In five of the six years from 2004 – 2009 NITE shares traded for more than 1.7x book value at their highs. In four of those years the P/BV exceeded 2x at the annual highs.
A bounce back to even 12.5x 2010 estimates would bring these shares back to $19.87. A return to 1.7x expected December 31, 2009 book value would also justify a high $19’s 12-month price target. That leaves at least a 35 – 40% upside from here.
Is $19.50 - $20 a reasonable expectation? NITE shares have exceeded that goal price in each of the past four calendar years including 2009.
Value Line is using a 14 multiple as ‘normal’ in figuring their 3 – 5 year target price. Morningstar carries a 4-star rating on NITE (with 5 being best) and sees ‘fair value’ as $21 /share. Standard and Poors lists a 12-month target price of $24 /share.
At a time when most stocks are nowhere near their 52-week lows you can grab shares of NITE today at just 6.5% above its nadir and 38.3% below its October 2009 high.
Ironically, the most recent full page report from Value Line was dated Oct. 23, 2009 when the shares were listed as $22.40. They ranked NITE shares as outperformers from that relative high point. Now, at a much better price, they have turned neutral on the shares. That’s typical for momentum investing. For me, though, a low entry price just increases my level of interest.
I’ve added to my position today and I’m also writing [selling] some LEAP puts for 2011 and 2012 expirations. Here are the current prices as of 3:35 PM on 12/14/09…
Option
Premium /share
Break-Even
% Protection
Jan. 2011 $15.00 puts
$2.50
$12.50
8.2%
Jan. 2011 $17.50 puts
$4.00
$13.50
5.2%
Jan. 2012 $15.00 puts
$3.40
$11.60
18.6%
Jan. 2012 $20.00 puts
$6.70
$13.30
6.6%
 
Selling these long term puts locks in lower than current pricing while providing nice upside over the next 13 to 25 months.
 
 


Disclosure: Author is long NITE shares and short NITE options. ]]> Mon, 14 Dec 2009 15:48:25 -0500  [NDQ:NITE] - $14.25  Dec. 14, 2009
Unbelievably cheap for no good reason.
Knight Capital Group provides electronic and voice financial security trade execution services to buy-side, sell-side, and corporate clients as a market maker, agent, and electronic execution provider. They are the largest wholesale market making firm for U.S. equity securities.
After hitting a multi-year high of over $23 /share in early October NITE shares have dropped to near their March 2009 panic lows again. Why? They reported that trading volume was down sequentially from October’s extraordinary levels. Here is the company’s own news release…
"Trading activity slowed in November despite the continued rise of the major market indexes... Nevertheless, Knight recorded solid year-over-year growth in dollar value traded due to higher volumes across products and services." Average daily dollar value traded in November 2009 was $24.6 billion, down approximately 11.2% from $27.7 billion in October 2009 and up approximately 10.4% from $22.3 billion in November 2008. Average daily U.S. equity trade volume in November 2009 was 3.6 million, down approximately 9.6% from 4.0 million in October 2009, and down approximately 14.0% from 4.2 million in November 2008. Average daily U.S. equity share volume was 13.1 billion in November 2009, down approximately 0.7% from 13.2 billion in October 2009, and up approximately 247.2% from 3.8 billion in November 2008.”
Knight is net debt free with more liquid assets than total debt. Earnings are substantial with Zacks estimating $1.44 /share this year and $1.59 /share for 2010. Book value is at record levels with an estimated $11.60 or so expected by year-end.
Here are Knight’s per share numbers from continuing operations as reported by Value Line:
Year
Sales
C/F
EPS
B/V
Avg. P/E
52-wk. range
2004
5.71
0.51
0.36
7.79
31.3x
8.10 – 17.30
2005
5.57
0.51
0.34
7.93
26.5x
7.30 – 11.00
2006
9.18
1.73
1.49
9.29
10.5x
9.00 – 20.50
2007
9.89
1.59
1.24
9.67
12.4x
11.50 – 21.80
2008
11.46
2.28
1.94
11.40
8.4x
11.00 – 19.80
2009*
10.80
1.90
1.44
11.60
13.9x
13.39 – 23.11
          * 2009 includes Q4 estimates
 
At today’s quote of $14.25 NITE trades for just 9.9x this year’s and < 9x next year’s estimates. Excepting the panic lows of 2008 that’s about the lowest valuation ever for this fine company. In five of the six years from 2004 – 2009 NITE shares traded for more than 1.7x book value at their highs. In four of those years the P/BV exceeded 2x at the annual highs.
A bounce back to even 12.5x 2010 estimates would bring these shares back to $19.87. A return to 1.7x expected December 31, 2009 book value would also justify a high $19’s 12-month price target. That leaves at least a 35 – 40% upside from here.
Is $19.50 - $20 a reasonable expectation? NITE shares have exceeded that goal price in each of the past four calendar years including 2009.
Value Line is using a 14 multiple as ‘normal’ in figuring their 3 – 5 year target price. Morningstar carries a 4-star rating on NITE (with 5 being best) and sees ‘fair value’ as $21 /share. Standard and Poors lists a 12-month target price of $24 /share.
At a time when most stocks are nowhere near their 52-week lows you can grab shares of NITE today at just 6.5% above its nadir and 38.3% below its October 2009 high.
Ironically, the most recent full page report from Value Line was dated Oct. 23, 2009 when the shares were listed as $22.40. They ranked NITE shares as outperformers from that relative high point. Now, at a much better price, they have turned neutral on the shares. That’s typical for momentum investing. For me, though, a low entry price just increases my level of interest.
I’ve added to my position today and I’m also writing [selling] some LEAP puts for 2011 and 2012 expirations. Here are the current prices as of 3:35 PM on 12/14/09…
Option
Premium /share
Break-Even
% Protection
Jan. 2011 $15.00 puts
$2.50
$12.50
8.2%
Jan. 2011 $17.50 puts
$4.00
$13.50
5.2%
Jan. 2012 $15.00 puts
$3.40
$11.60
18.6%
Jan. 2012 $20.00 puts
$6.70
$13.30
6.6%
 
Selling these long term puts locks in lower than current pricing while providing nice upside over the next 13 to 25 months.
 
 


Disclosure: Author is long NITE shares and short NITE options. ]]> nite long ideas options financials Traders Expo - NYC February 14 - 17 2010 http://seekingalpha.com/instablog/166130-paul-price/39646-traders-expo-nyc-february-14-17-2010?source=feed 39646  

Dear Trader,

Over the last year we have seen some of the most dramatic changes in global markets in decades. Traders who use proven trading strategies and combine outstanding risk management techniques with superior analytic and execution tools have profited handsomely from today's market environment. Both beginning and experienced traders who attend The Traders Expo in New York, February 14-17, 2010, will find the tools, education, strategies, and insight necessary to profit in any market environment.

I would like to invite you to be my guest at The Traders Expo in New York, where you will meet and learn from me and other trading experts such as Linda Raschke, Alexander Elder, Rob Booker, John Carter, and more than 50 others!

During the Expo, you can choose from over 125 free presentations that cover nearly every trading related topic, plus a select offering of optional, paid intensive events. See live, "hands-on" demonstrations of the latest software and trading tools, and visit our first-class Exhibit Hall with more than 100 exhibits featuring the tools and services that meet your active trading needs.

View the Schedule Learn More Register Free!

Please join me for the following special presentations:

Benj Gallander
PAUL PRICE
Using Equity Options to Reduce Risk and Increase Profits

Monday, February 15
6:00 pm - 7:00 pm

Don't forget to visit the VectorVest booth - #

Discover complete Expo details, learn how to attend, and register for free online! Or call 800/970-4355 and mention priority code 016279.

I hope that you will join me in New York for this exciting and timely conference. See you at the Expo!

Sincerely,

Paul Price

P.S. Be sure to attend this year's New York Traders Expo, February 14-17, 2010, where you will hear hundreds of varying viewpoints on nearly every trading topic. In these market conditions, you can't afford to miss this event. More than 50 leading experts will provide you with specific strategies and techniques that will help you profit! Register FREE online or call 800/970-4355 and mention priority code 016279.



Disclosure: No disclosures.]]> Sun, 13 Dec 2009 07:06:58 -0500  

Dear Trader,

Over the last year we have seen some of the most dramatic changes in global markets in decades. Traders who use proven trading strategies and combine outstanding risk management techniques with superior analytic and execution tools have profited handsomely from today's market environment. Both beginning and experienced traders who attend The Traders Expo in New York, February 14-17, 2010, will find the tools, education, strategies, and insight necessary to profit in any market environment.

I would like to invite you to be my guest at The Traders Expo in New York, where you will meet and learn from me and other trading experts such as Linda Raschke, Alexander Elder, Rob Booker, John Carter, and more than 50 others!

During the Expo, you can choose from over 125 free presentations that cover nearly every trading related topic, plus a select offering of optional, paid intensive events. See live, "hands-on" demonstrations of the latest software and trading tools, and visit our first-class Exhibit Hall with more than 100 exhibits featuring the tools and services that meet your active trading needs.

View the Schedule Learn More Register Free!

Please join me for the following special presentations:

Benj Gallander
PAUL PRICE
Using Equity Options to Reduce Risk and Increase Profits

Monday, February 15
6:00 pm - 7:00 pm

Don't forget to visit the VectorVest booth - #

Discover complete Expo details, learn how to attend, and register for free online! Or call 800/970-4355 and mention priority code 016279.

I hope that you will join me in New York for this exciting and timely conference. See you at the Expo!

Sincerely,

Paul Price

P.S. Be sure to attend this year's New York Traders Expo, February 14-17, 2010, where you will hear hundreds of varying viewpoints on nearly every trading topic. In these market conditions, you can't afford to miss this event. More than 50 leading experts will provide you with specific strategies and techniques that will help you profit! Register FREE online or call 800/970-4355 and mention priority code 016279.



Disclosure: No disclosures.]]>